Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.

Saturday, 11 February 2017

More nonsense from Ann Pettifor.

I’ve just stumbled across more nonsense in AP’s talk the other day at the LSE. I should really have included this new material in a post I did a few days ago on this subject. But no harm done: as I said in that post, this is only a provisional look at her ideas. I’ll do a proper review when I get a copy of her book.

Anyway, the new passage I just stumbled across is as follows. (It starts at around 38.30 in this audio.)

“The sovereign money movement propose that we should abolish debt, strip banks of their powers to create currency in the words of Mary Mellor, the sociologist, and return to a debt free, gift base economy. This would effectively nationalise the money supply which would be expanded or contracted by a committee at the top of the world or a central bank, so that new public money could be issued by new public money authorities, free of debt to meet public needs. Interest rates would be left to the will of the market.

I worry at the authoritarian implications of transferring such economic power to unaccountable bureaucrats at the central bank. But for the purposes of this discussion, debt free money is an oxymoron. There is no such thing a debt free money. Or if there is, it is very likely something quite different: a grant or a gift. Now there is no reason why society should not aspire to building a gift based economy, one in which everyone relies on others for what Mary Mellor calls “provisioning”: for clean air, works of art, or a smart phone. But today while we still enjoy the remnants of a gift bearing culture. We have failed to build an entirely gift based economy.”

Let’s take that sentence by sentence.

“The sovereign money movement propose that we should abolish debt, strip banks of their powers to create currency in the words of Mary Mellor, the sociologist, and return to a debt free, gift base economy.”

“Abolish debt”?? God knows where AP gets that idea from. If she actually read Mary Mellor’s works or those of Positive Money (both advocates of a sovereign money system) AP would find that under such a system businesses and household carry on very much as they do now. Far from “abolishing debt”, people would continue to get mortgages, though what advocates of sovereign money DO CLAIM is that under their system, debts would decline SOMEWHAT.

AP might also like to ponder the fact that at least four Nobel laureate economists advocate a sovereign money system, including Maurice Allais and Milton Friedman. And another economist what advocates sovereign money is Lawrence Kotlikoff. Nowhere in the works of the latter will AP find anything about “abolishing debt” or converting to a “gift based” economy.

Incidentally, I do get the sense that Mary Mellor, who is fairly left wing, does actually want to implement a gift based economy (whatever that is). However other advocates of sovereign money certainly do not, and even Mary Mellor keeps that aspiration well separate from sovereign money.

Next, let’s take this sentence: “I worry at the authoritarian implications of transferring such economic power to unaccountable bureaucrats at the central bank.”

Seems AP doesn’t understand how the EXISTING system works because very much the same powers are exercised by “unaccountable bureaucrats” in the shape of the Bank of England Monetary Policy Committee (shock horror).

To illustrate, the independent BoE has created VAST amounts of money over the last few years as a result of QE. As it happens, the BoE did consult with the then UK finance minister Alistair Darling before implementing QE. However, given that the BoE is nominally independent, I doubt there was anything FORCING them to consult. Moreover, far as I know other central banks did not consult before implementing QE.

Secondly, that dreadful “unaccountable” Monetary Policy Committee actually controls how much money private banks create as a result of the MPC’s control of interest rates. In short, the total amount of power wielded by “unaccountable bureaucrats” under our existing system is not much different to the amount they would wield under sovereign money. Certainly the MPC does not consult politicians when adjusting interest rates.

Next, AP says “There is no such thing a debt free money. Or if there is, it is very likely something quite different: a grant or a gift.”

That point has actually been extensively debated by economists in recent years. The consensus is that money created by private banks is indeed “debt based”. Or put it another way, for every $ of money created by a private bank, there is a $ of debt. Or to use a popular phrase, privately created money “nets to nothing”. MMTers often make that point.

As to central bank created money, obviously that is OSTENSIBLY a debt owed by CBs to the holder of such money. Indeed UK £10 notes actually say the Bank of England will “pay the bearer on demand the sum of £10”. But that phrase is just a historical anachronism. I go into this issue in a bit more detail here.

And finally as regards AP’s claim that sovereign money (i.e. base money) necessarily involves a grant or a gift is pure nonsense. There is precisely nothing to stop the state creating fresh “state created money” (aka sovereign money) and spending that on hospitals, schools, defence, roads or whatever. In that case, the money is not a gift in the sense that the private sector gets the latter goodies for free. The private sector has to engage in a huge amount of blood, sweat and tears in order to bring hospitals, schools and new roads into existence. Plus the main contractors responsible for creating those investments sub-contract various jobs to sub-contractors and pay them cash. I.e. commerce carries on as before. There is nothing resembling a “gift economy” there.

Moreover, fiscal stimulus followed by QE (what we’d done big time in recent years) equals “create sovereign money and spend it”. That is, as a result of the crisis, governments have borrowed $X, spent $X and given $X of bonds to lenders. Governments (or rather their central banks) have then printed fresh sovereign / base money and bought back those bonds. That all nets out to “government prints new sovereign money and spends it”.

Far as I know, neither the US nor the UK have suddenly turned into “gift” or “semi-gift” economies because of QE etc.

3 comments:

What is "gift or grant based money",I have never heard of such a thing before.

I am also tired of this dbt free monet n such thug as "debt free money" debate.The state can and does create money at will,no individual goes into debt,what is so hard to accept about that?That is all it means to me.I the fall asleep afetr that while they argue about how the accountants then fill out the central banks ledgers.

Lack of editing isn't a problem. Warren Mosler actually goes for the "unedited" style in some of his communications (emails and comments after articles): i.e. typos etc all over the place. That style saves time. Personally I like to try to get everything right: just my style.

Tim Worstall makes regular use of the "F" word and the "C" word. That appeals to my schoolboy sense of humour. But personally I don't use those words: just my style.

Re debt free money, some well known economists (e.g. Randall Wray) claim that base money is a debt owed by the state. I do think we need to look at those arguments, which I’ve done. Wray & Co do make some not bad points, but basically their arguments don’t stand up.

Non-peer reviewed (or only lightly peer reviewed) publications. The coloured clickable links below are EITHER the title of the work, OR a very short summary (where I think a short summary conveys more than the title).

i) The above is not a complete list in that earlier versions of some papers have been omitted. For a more complete list see here, and “browse by author” (top of left hand column).

ii) 7 deals with a wide range of alleged reasons for government borrowing, including Keynsian borrow and spend. 6 is an updated version of the "anti-Keynes" arguments in 7. 5 is an updated version of 1, which in turn is an updated version of 4.

______________

.

Bits and bobs.

.

As I’ve explained for some time on this blog, the recently popular idea that “banks don’t intermediate: they create money” is over-simple. Reason is that they do a bit of both. So it’s nice to see an article that seems to agree with me. (h/t Stephanie Schulte). Mind - I've only skimmed thru the intro to that article.________

Half of landlords in one part of London do not declare rental income to the tax authorities. I might as well join in the fun. I’ll return my tax return to the authorities with a brief letter saying, “Dear Sirs, Thank you for your invitation to take part in your income tax scheme. Unfortunately I am very busy and do not have time. Yours, etc.”________

Simon Wren-Lewis (Oxford economics prof) describes having George Osborne in charge of the economy as being “similar to someone who has never learnt to drive, taking a car onto the highway and causing mayhem”. I’ll drink to that.

Unfortunately SW-L keeps very quiet, as he always does, about the contribution his own profession made to this mess. In particular he doesn’t mention Kenneth Rogoff, Carmen Reinhart or Alberto Alesina – all of them influential economists who over the last ten years have advocated limiting stimulus (because of “the debt”) if not full blown austerity.________

Plenty of support in the comments at this MMT site for the basic ideas behind full reserve banking, though the phrase “full reserve” is not actually used.________

Old Guardian article by Will Hutton claiming the UK should have joined the Euro. Classic Guardian and absolutely hilarious.________

One of the first “daler” coins (hence the word “dollar”) weighed 14kg.!!! Imagine going shopping for the groceries with some of those in your pocket, or should I say “in your wheelbarrow”. (h/t J.P.Koning)________

Moronic Fed official reveals that GDP tends to rise when population rises. Next up: Fed reveals that grass is green and water is wet….:-)________

Fran Boait of Positive Money says the Bank of England "has no capacity to respond to a future crisis, and that puts us in an extremely dangerous position." Well certainly there are plenty of twits at the Treasury and at the BoE who THINK responding will be difficult. Actually there's an easy solution: fiscal stimulus, funded (as suggested by Keynes) by new money. Indeed, that’s what PM itself advocates. But it’s far from clear how many people in high places have heard of Keynes or, where they have heard of him, know what his solution for unemployment was.________

The US debt ceiling has been suspended or lifted 84 times since it was first established. You’d think that having made the Earth shattering discovery 84 times that the debt ceiling is nonsense, that debt ceiling enthusiasts would have learned their lesson, wouldn’t you? I mean if I got drunk 24 times and had 24 car crashes soon afterwards, I’d probably get the point that alcohol causes car crashes…:-) As for getting drunk 84 times and having 84 car crashes, that would indicate extreme stupidity on my part. No?________

The US Treasury has the power to print money (rather in the same way as the UK Treasury printed money in the form of so called “Bradburies” at the outbreak of the first World War).________

“Payment Protection Insurance” was a trick used by UK banks: it involved surreptitiously getting customers to take out insurance against the possibility of not being able to make credit card or mortgage payments. UK banks have been forced to repay customers billions. But that’s just one example of a more general trick used by banks sometimes called “tying”: forcing, tricking or persuading customers to buy one bank product when they buy another. More details here on the Fed’s half-baked attempts to control tying in the US.________

The farcical story of economists’ apparent inability to raise inflation continues. As I’ve long pointed out, Robert Mugabe knows how to do that. In fact Mugabe should be in charge of economics at Harvard: he’d be a big improvement on Kenneth Rogoff, Carmen Reinhart and other ignoramuses at Harvard.________

I’ve removed comment moderation from this blog. The only reason I ever implemented it was so as get rid of commercial organisations advertising something and posing as commenters. When doing that I noticed comments were limited to people with Google accounts for some strange reason. Removed that as well. ________

Article on money creation by Prof Charles Adams, who as far as I can see is a professor of physics at my local university – Durham. I can’t fault the first half of his article, but don’t agree with the second half which claims both publically and privately issued money are needed because we have a public and private sector. I left a comment.

Adams is nowhere near the first physicist to take an interest in money creation. Another is William Hummel. These “physicist / economists” are normally very clued up (as befits someone with enough brain to be a physicist).________

.

MUSGRAVE'S LAW SOLVES THE FOLLOWING PROBLEM.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A